Chemed Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Chemed operates VITAS hospice care and Roto-Rooter plumbing, drain-cleaning and water-restoration services. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
- Revenue: $439.2, up 8.2% from $405.9. VITAS revenue was $292.0, up 3.4%; Roto-Rooter revenue was $147.2, up 19.1%.
- Earnings: Operating income was $56.4 versus $41.5; net income was $45.0 versus $29.8, up 50.8%. Diluted EPS was $2.66 versus $1.78. Adjusted diluted EPS, a non-GAAP measure, was $2.72 versus $1.82.
- Margins and EBITDA: Consolidated gross margin increased to 30.7% from 29.7%. VITAS gross margin was 22.2% versus 21.5%; Roto-Rooter was 47.5% versus 48.6%. Adjusted EBITDA was $72.8, or 16.6% of revenue, versus $59.8, or 14.7%.
- Cash flow: Operating cash flow was $65.2, down from $68.8. Investing activities used $13.9, including $12.6 of capital expenditures and $1.5 for an acquisition. Financing activities used $48.7, including $81.1 of share repurchases, partly offset by net revolving-credit borrowings.
- Liquidity and debt: Cash was $13.7. Current assets of $161.5 were below current liabilities of $177.3. Total debt was $142.5 ($70.0 revolving credit and $72.5 term loan), up from $101.2 at year-end. Chemed reported $244.2 of available revolving capacity and compliance with debt covenants.
- Capital returns: The quarterly dividend was $0.28 per share versus $0.26. Chemed repurchased 300,000 shares for $81.1 at an average $270.42 per share; $124.4 remained authorized under the repurchase program at quarter-end.
Changes versus the prior-year quarter
- Revenue growth reflected higher Roto-Rooter activity, including water restoration, and VITAS census growth. VITAS average daily census rose 6.1%; total days of care also rose 6.1%.
- Net income increased $15.2. Management attributed improvement to revenue growth, higher VITAS margins and a lower effective tax rate. The rate was 19.9% versus 30.5%, primarily reflecting U.S. tax reform; excess stock-compensation tax benefits reduced tax expense by $3.8 in 2018 and $3.7 in 2017.
- Operating cash flow declined $3.6, principally because the contribution from accounts-receivable changes was lower; management said VITAS cash receipts can vary with the timing of federal payments.
- Chemed adopted ASC 606 on January 1, 2018 using the modified retrospective method; 2017 was not restated. Revenue and expense classification changes reduced reported Q1 2018 revenue by $7.4 versus the former presentation, with no impact on net income. This limits direct year-over-year comparability.
- The prior-year quarter included $2.2 of OIG-investigation expenses and $0.9 of VITAS program-closure costs; neither was recorded in Q1 2018.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management said liquidity and capital sources were satisfactory for foreseeable needs and anticipated continued covenant compliance.
- VITAS operates in a heavily regulated sector; more than 90% of its service revenue came from Medicare and Medicaid. A $1.8 Medicare-cap revenue reduction recorded in Q4 2017 was reversed in Q1 after improved program metrics. Chemed disputes CMS’s “as if” sequestration methodology and appealed approximately $2.5 of Medicare-cap amounts withheld for prior measurement periods.
- The 2013 VITAS federal hospice matter was dismissed in February 2018 following the 2017 settlement. Chemed paid $75 plus interest and related fees in Q4 2017; a five-year Corporate Integrity Agreement requires monitoring, reporting, audits and other compliance measures. Breach could result in penalties or exclusion from federal healthcare programs. A $1.1 accrual remained for Illinois settlement and unpaid legal/administrative costs.
- Several California VITAS employee lawsuits seek class-action treatment. The company said it could not reasonably estimate the probability or range of loss and intends to defend the claims. A shareholder derivative matter also remained pending; associated defense costs were being paid by insurance.
- Other exposures include variable-rate debt ($142.5 outstanding) and pharmacy-provider concentration: one provider supplied more than 90% of VITAS pharmacy services in the quarter.
Important facts for investors to verify
- How much of reported growth and margin improvement reflects underlying activity versus ASC 606 classification changes, tax reform and the Medicare-cap reversal.
- Whether VITAS census, patient mix, Medicare-cap estimates and CMS appeal outcomes support continued revenue and margin performance.
- Debt and liquidity trends after substantial share repurchases, including interest-rate exposure and scheduled term-loan repayments.
- Developments in the Corporate Integrity Agreement, California employment litigation and remaining settlement accruals.
- The sustainability of Roto-Rooter’s water-restoration growth and its effect on segment margins.